Handle yuan accounts with care

By Shiu Yung-ming 許永明

Now that the government has permitted Taiwanese banks to offer yuan-denominated deposit accounts, some banks are seeking to lure customers to open such accounts by offering annual interest rates as high as 2 or 3 percent. However, these high interest rates cannot be maintained forever — they will eventually be reduced significantly, especially when more Chinese currency becomes available in Taiwan.

The interest rates that banks offer on yuan accounts will eventually be decided based on how much Chinese currency they need. A bank may have many channels through which to clear yuan, some that may be legal and others, not yet approved, that are on the margins of the law.

For example, banks could lend yuan to businesses operating in China — including Chinese state-run and private companies, as well as those owned by Taiwanese and other overseas investors — or they may invest the currency in bonds issued by Chinese state-run companies or banks. If so, the banks may seek to attract yuan deposits by offering high interest rates on yuan accounts.

If, on the other hand, a bank has no legal channels for clearing yuan — which at present is true for most Taiwanese banks — it will eventually have to cut its interest rates in order to avoid incurring a loss.

Given that an increasing number of people are expected to open yuan deposit accounts, and that businesses which have deposited their yuan funds in Hong Kong banks may move some of that money to Taiwan, the reserves of yuan available to Taiwanese banks is likely to increase. This would reduce Taiwanese banks’ need for yuan, so they would have to lower interest rates on yuan accounts.

In addition, even banks that have viable, legal channels for clearing yuan may not offer very high interest rates on Chinese currency accounts, because what these banks want are large deposits of yuan, for which they will be willing to negotiate the interest rate.

Small deposits are just a drop in the ocean compared with the amounts of money that banks need for their lending services, so they have little reason to offer high interest rates on private, individual yuan accounts.

As yuan is a foreign currency, it carries foreign exchange risk. For members of the public, the difference between the buying and selling prices of foreign currency can be as high as dozens of basis points.

Generally, banks that offer very high interest rates tend to have bigger differences between the buying and selling prices in their posted exchange rates. When dealing with such banks, people find themselves buying yuan at a high price and then selling the currency to the bank at a lower price.

In other words, banks may give people an attractive offer in terms of interest rates, which are highly visible, while customers end up paying it back to the bank through the difference in exchange rates, which are not so easy to compare.

If people choose to buy their yuan from banks that offer low selling prices and then transfer the funds to other banks that pay high interest rates, one might think that they would get a good deal on both the exchange and interest rate.

However, banks usually charge a handling fee for transferring and releasing funds, so people who adopt this strategy may not benefit from it.

Besides, some banks may only pay interest on deposits above a certain amount, or may insist that customers buy other wealth management products.